Read on to know about the impact of SEBI F&O as the market regulator releases its consultation paper.
Market regulator SEBI, on Tuesday, released seven proposals on F&O trading, and together, they are aimed at de-addicting retail traders from derivatives. Overall, there are proposals targeted at retail traders, brokers, exchanges among others.
Securities Exchange Board of India (SEBI) has proposed several measures to deal with speculative trading in index derivatives, which is considered to be gambling by some. Coming to the changes, there has been a reduction introduced in the number of option contracts that expire each week. Meanwhile, there has been announced an increase in the size of these contracts.
The capital markets regulator has come up with seven measures that are aimed at reducing market speculation, apart from protecting investors better, and improving market stability.
SEBI’s recent proposals come after a few economists and market experts raised concerns about the risks of retail investors taking part in speculative trading in derivatives. Hence, it is more or less a reaction to the increasing retail participation and high trading volumes in short-term index options.
Check out the list of seven proposals by SEBI in its consultation paper to strengthen index derivatives framework:
1. Rationalisation of weekly index products: SEBI has introduced weekly options contracts which can be provided in a single benchmark index of an exchange.
2. Minimum contract size: As per the markets regulator, the minimum contract size for index derivatives contract needs to be altered considering the overall growth in the broad market parameters. It can be done in a phased manner. Phase 1: Minimum value of derivatives contract can be launched between Rs1.5mn to Rs2mn. Phase 2: After 6 months, it can be introduced between the interval of Rs2mn to Rs3mn
3. Amping up margin near contract expiry: There will be an increase in the margins on expiry day and the day before expiry in the following manner a. At the start of the day before expiry, Extreme Loss Margin (ELM) can be amped up by 3%. b. At the start of expiry day, it can be further increased by 5%.
4. Rationalisation of options strikes: Coming to the strike scheme for weekly/monthly index options contracts, they should be based on the following
a. Strike interval to be fixed up to a percentage coverage near prevailing index price
b. The strike interval to be increased beyond the initial coverage threshold so that fewer strikes are introduced further away.
c. The number of strikes at the time of introduction should not cross 50.
d. New strikes to be introduced on a daily basis.
5. Collection of option premium from options buyers: Members can collect option premiums on an upfront basis from their clients.
6. Removal of calendar spread benefit: The margin benefit for calendar spread positions will not be provided anymore.
7. Intraday monitoring of position limits: The position limits for index derivative contracts should be always kept an eye on by clearing corporations/stock exchanges on an intra-day basis.
